Positive Signs for Residential Property (The Bugle)

As we enter the fourth and final quarter of the year, time seems to accelerate and within the next month the building industry and suppliers to it will be finishing off for the year. Whatever you need to get done from a home improvement point of view, aim to have it done within the next three weeks. It becomes almost impossible to get anything done the closer we get to December. For those involved in the holiday rental market, by now December is let with no vacancy signs being posted. We can expect another busy holiday season in Ballito this year. 

On the residential property sales market, it is best described as stable. FNB’s current house price index is showing year-on-year nominal growth of 6,6% (September 2013), up from 6,3% in August. This is basically in line with CPI inflation, and real house prices showed a slight decline of -0.11%. It has been almost six full years since the peak in real residential home prices in December 2007 with current real prices -20.2% down on that level. For those folks who bought property at the height of the market in 2007, it is still going to be tough to realize higher pricing in today’s market. I remember vividly in 2008/9 that market commentators were saying that the lower cycle of the market could last as long as five years. At the time this seemed like an inconceivably long period, but this is exactly what has happened. This year to date has been very positive for residential home sales but it is in the face of contrary fundamentals of low GDP growth (only 2% currently) and tight lending criteria imposed by banks who remain nervous. For me there are some very positive signs, which we should be aware of. 

The gap between demand and supply is narrowing. The best measure of this in the residential property market is the FNB’s Valuer’s Residential Market Strength Index. The demand rating has been slowly edging upwards and for the first time since 2008 has risen above the threshold 50 level, while the supply rating has been edging downwards. This movement to a position of equilibrium is good news and will translate into a property market where the stock, which is correctly priced and offers value, will tend to attract buyers. The next positive aspect is that interest rates remain relatively low at a prime rate of 8,5% and stable. In September the South African Reserve Bank’s monetary committee again resolved the leave interest rates unchanged. The general outlook is that interest rates will remain flat through to end 2015. This stability provides for a level of confidence in the market that the cost of money will remain manageable. Even though interest rates are higher than growth in house prices, meaning that any speculative buying will be very limited and buy-to-let activity will also be subdued. As an astute property investor you should celebrate this as it means that you can actively shop around for the best deal on an investment property without the disruption of too much competition. When buying an investment property, restrict your decision-making criteria to the initial gross rental yield only and exclude your estimate of future capital growth.

(Author: Andreas Wassenaar, published in The Bugle, 9 Oct 2013)